US Treasury prices eased on Wednesday as strong manufacturing data, swooning oil prices and a rally in stocks reinforced a recent sell-off in longer-dated debt. But losses were relatively modest despite several bond-negative developments, mostly because three straight days of selling had worn out most bears. The benchmark 10-year note dipped 4/32 for a yield of 4.37 percent from 4.35 percent on Tuesday.
Friday's jobs report is the next key hurdle for bonds - it would either corroborate the improving labour trend of the past few months or cast doubt on those employment gains.
That in turn would affect market perceptions of future monetary tightening from the Federal Reserve. Analysts are currently expecting a fifth interest rate hike at the central bank's December meeting and further increases into 2005.
A jump in the Institute for Supply Management's factory jobs component certainly boded well for the jobs data.
The ISM's main activity index rose to 57.8 in November from 56.8 the previous month, just topping forecasts of a rise to 57.0.
The breakdown was stronger, with new orders up and the employment index bouncing after a drop in October.
Strength in payrolls would make it more likely the Fed would keep raising interest rates well into the new year.
Futures show a better than 90 percent chance of a hike to 2.25 percent at the Fed's next meeting on December 14 and are already pricing in rates of 3.0 percent by May.
The figures, coupled with a fresh drop in oil prices, were enough to sap the steam from a technical bounce after two days of heavy selling.
Traders said fresh sell orders were lurking around 4.30 percent, and bears were looking for a retracement to 4.41 percent or to July's peak of 4.64 percent.
On Wednesday, the two-year Treasury note was flat and yielding 3.01 percent.
The five-year note was also stuck in neutral for a yield of 3.71 percent.
In contrast, the 30-year bond shed 4/32, lifting its yield to 5.02 percent from 5.00 percent.